The development leaves Iran with substantially less of the 20% enriched uranium that it would need for a nuclear warhead.

Iran denies any interest in atomic arms. But it agreed to some nuclear concessions in exchange for a partial lifting of sanctions crippling its economy under the deal, which took effect in January.

Uranium at 20% is only a technical step away from weapons-grade material. By the time the agreement was reached late last year, Iran had amassed nearly 200 kilos (440 lbs). With further enrichment, that would have yielded almost enough weapons-grade uranium for one atomic bomb - a threshold Israel had vowed it would prevent by any means possible.

Under its agreement, Iran agreed to stop enriching to grades beyond 5%, the level most commonly used to power reactors. It also committed to neutralising all its 20% stockpile - half by diluting to a grade that is less proliferation-prone and the rest by conversion to oxide used for reactor fuel.

The UN's International Atomic Energy Agency confirmed today that Iran had completed the dilution process.

A confidential IAEA report obtained by the AP earlier said conversion was well under way, with over 50 kilos (110 lbs) of the 20% material rendered into oxide.

Iran has until July to fulfil all of its commitments under the deal. But it has to show progress in exchange for sanctions relief, and it is eager to get its hand on the next tranche of some 4.2 billion dollars (£2.5bn) of oil revenue funds that were frozen under international sanctions meant to force it into nuclear compromise. It already has received more than half of that amount in exchange for step-by-step implementation of the agreement.

The November deal between Iran and the six - the United States, Russia, China, Britain, France and Germany - is meant to lead to a comprehensive deal placing long-term caps on Iran's enrichment programme and other atomic activities in exchange for full sanctions relief. The two sides hope to reach agreement by July.